Wednesday, June 22, 2016

Even though discussions about the possible inclusion of the renminbi started as long ago as the 2010 Review, the Executive Board decided only last November that the Chinese currency would join the SDR as of 1 October...- BIS


News Release -  The renminbi in the SDR basket and its future role in the international financial system   -    Remarks by Mr Peter Zöllner, Head of Banking Department of the BIS, at the 2016 MEFMI Governors' Forum





I would like to thank you for the invitation to come here and speak about the imminent inclusion of the renminbi in the SDR basket.

This debut represents an acknowledgment of China's remarkable success in opening up its markets, and it elevates the renminbi to the ranks of the most important international currencies.

I will approach this talk by first outlining some basic facts about the SDR and its origins. I will then move to an analysis of the major steps in the renminbi's progress towards becoming an international currency worthy of SDR status. Finally, I will discuss what inclusion in the basket means for the renminbi as a reserve currency. Here, I will also touch on how the BIS has been preparing for this change.

1. Introduction: the SDR

The SDR is a synthetic currency created in 1969 by the IMF. Its value was initially expressed in terms of gold, as it was conceived in a monetary system where the link between currencies and gold set limits on how far the growing demand for reserves could be met.

With the end of the Bretton Woods system in 1971, the SDR's composition changed to include the currencies of countries with the largest shares of exports of goods and services. From 1974, it comprised 16 currencies (the US dollar's weighting was 33%, a percentage already higher than the country's share of world exports), but in 1981 the synthetic currency was downsized to include just the G5 currencies, being the US dollar, Japanese yen, Deutsche mark, pound sterling and French franc. In 1999, the euro replaced the former European currencies, and the SDR became a four-currency basket.

As of 1 October 2016, the basket will be enlarged to include the renminbi as the fifth currency.

The SDR today not only plays its initial role as a composite alternative reserve asset. It has been occasionally used as a reference for various transactions undertaken by official institutions and it also has been adopted as unit of account by a number of official institutions,2 including the BIS. 

The weights and the composition of the currencies comprising the SDR are revised every five years by the IMF's Executive Board. These reviews determine the relative weights of each currency in the basket and establish which financial instruments should be used to calculate the SDR interest rate.

Even though discussions about the possible inclusion of the renminbi started as long ago as the 2010 Review, the Executive Board decided only last November that the Chinese currency would join the SDR as of 1 October.

This decision was based on the fulfilment of two broad criteria set by the IMF:

The first "gateway" criterion affirms that only the currencies issued by (member) countries or monetary unions with the largest value of exports over a period of five years can be considered. This criterion responds to a need to ensure that only currencies that play a significant role in the global economy can be considered for inclusion in the SDR.

The second criterion requires that the potential currency is "freely usable".

As described by the IMF, free usability refers to two main concepts. First, the currency must be widely used to make payments in international transactions. Additionally, the currency must be widely traded in the principal exchange markets, meaning that large amounts of currency can be traded at any time without significant change in the exchange rate (implying the need to be able to trade around the clock). In other words, each currency in the basket must have a broad and deep foreign exchange market, including for hedging.

The concept of "free usability" is different from both the free-floating and fully convertible concepts. A currency can indeed be free-floating but not freely usable (for example, the yen and the pound were considered freely usable even at times when some capital controls were in place). Likewise, a currency that is fully convertible might not be widely used or traded. The free usability criterion responds to the need that a member purchasing another member's currency from the IMF would be able to use it, both directly and indirectly (ie exchanging it into another currency) to meet its balance of payments needs.




Copyright: Centralbahnplatz 2 4051 Basel
Switzerland BISBCHBB   Website:www.bis.org


page source https://www.bis.org/